Determine the price rate-demand , Basic Statistics

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SkyyMarley Airlines has determined that the price elasticity of demand for two customer segments (Coach and Business Class) is -1.35 and -2.50.  Based on their expectations of profitability, SkyyMarley realizes the price of a Coach seat should be $175 (one way).  How much should SkyyMarley charge for a Business Class ticket?  (

The relation between elasticity, P and MC when profits are maximized is

MC= P(1-1/e) where is the absolute value of elasticity of demand.

For a coach seat

MC= 175( 1-1/1.35 )= 45.37

Assuming MC is same for business class

P= MC/ (1-1/e) = 45.37 /(1-1/2.5) = 75.616-it can charge this price for business class

 


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